CITY OF LONGMONT OIL AND GAS PROPOSED NO-SURFACE-USE AGREEMENT PUBLIC QUESTION-AND-ANSWER FORUM MAY 15, 2018

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1 CITY OF LONGMONT OIL AND GAS PROPOSED NO-SURFACE-USE AGREEMENT PUBLIC QUESTION-AND-ANSWER FORUM MAY 15, 2018

2 PRESENTATION OUTLINE The City Strives to Protect Its Residents and the Environment from Oil and Gas Operations. Oil and Gas Regulations Top Operating Master Contract Litigation Environmental Stewardship Proposed Cub Creek Energy and Top Operating Site Relinquishment and Lease Agreement

3 NEW AGREEMENT, MAIN POINTS Move potential well sites out of the City. Plug and abandon existing wells promptly. Lease minerals to Cub Creek. Avoid imminent forced pooling. Compensate TOP for its release of rights, to be paid from the lease royalties.

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5 JULY 17, 2012 COUNCIL MEETING The Council approved: New City Regulations Top Operating Master Contract

6 OIL AND GAS REGULATIONS Voluntary Standard Fast Track Review Mandatory Standards P&Z Hearing 750 Setback from Occupied Buildings Residential Zoning Restriction 300 Setback from Water Bodies Groundwater Monitoring Closed Loop/Pitless Systems Consolidated Well Sites and Horizontal Drilling Whenever Appropriate Noise Mitigation Visual Mitigation Low Profile Tanks, Color and Relocation Cultural resources report, emergency planning, no temporary housing

7 MASTER CONTRACT WITH TOP Consolidated potential oil and gas development on City properties in eastern Longmont. Complex business deal: property purchases, leases, reciprocal compensation, covenant not to sue, operating agreement.

8 Potential wells locations per COGCC regulations

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11 NEW SLIDE! REASONABLE ACCOMMODATION Severed mineral rights lack value unless they can be developed. For this reason, the owner of a severed mineral estate or lessee is privileged to access the surface and use that portion of the surface estate that is reasonably necessary to develop the severed mineral interest. Gerrity Oil & Gas Corp. v. Magness, 946 P.2d 913, 926 (Colo. 1997).

12 MASTER CONTRACT: KEY POINTS Rider well closure. Reduced potential drill locations to foot buffers from occupied buildings. Water quality monitoring; performance standards. New leases to TOP, and lease ratifications. $1.1 million net reimbursement to TOP for added costs, to be paid from lease royalties as they accrued.

13 CITIZEN INITIATIVE, NOV By citizen initiative, Article XVI of the Longmont Municipal Charter prohibited fracking and the storage or disposal of fracking waste. City Council announced that the City would vigorously defend the charter amendment.

14 Two Cases COGCC v. Longmont, challenging the ordinance COGA joined. COGA v. Longmont, challenging the citizen-initiated charter amendment. COGCC and TOP Operating Co. join. Citizen groups join the City to defend the lawsuits.

15 City s Arguments in the Fracking Case Home rule authority: Health/Environmental Impacts: Air quality asthma, cancer, birth defects Water pollution, spills Traffic fatalities, fires Property values, quality of life The City s Interest in Protecting Its Citizens and the Environment Outweighed the State s Interest in Allowing Fracking.

16 City s Arguments in the Fracking Case The Charter Amendment Did Not Conflict with State Law. Fracking is just one method for extraction. The State does not expressly authorize fracking. State law also requires protection of people and the environment. Now see Martinez. The City Demanded a Jury Trial on these Issues.

17 Supreme Court Supreme Court Oral Arguments, Dec Supreme Court Opinion May 2, 2016 Holding: State law preempts Longmont s fracking ban due to operational conflict. Result: Ban overturned.

18 NEW! PREEMPTION Expre ss Implie d Confli ct

19 NEW SLIDE! OPERATIONAL CONFLICT [A] local law may be partially preempted where its operational effect would conflict with the application of the state statute. Bd. of Cty. Comm'rs, La Plata Cty. v. Bowen/Edwards Assocs., Inc., 830 P.2d 1045, 1057 (Colo. 1992). Materially impede vs. forbids/authorizes

20 NEW SLIDE! OPERATIONAL CONFLICT Any determination that there exists an operational conflict between the county regulations and the state statute or regulatory scheme, however, must be resolved on an adhoc basis under a fully developed evidentiary record. Bd. of Cty. Comm'rs, La Plata Cty. v. Bowen/Edwards Assocs., Inc., 830 P.2d 1045, 1060 (Colo. 1992).

21 NEW SLIDE! OPERATIONAL CONFLICT In virtually all cases, this analysis will involve a facial evaluation of the respective statutory and regulatory schemes, not a factual inquiry as to the effect of those schemes on the ground. City of Longmont v. Colorado Oil & Gas Ass'n, 2016 CO 29, 42, 369 P.3d 573, 583.

22 Back to the Regulations Case Governor s Compromise, October 2014; the State and the industry dismiss all their claims and covenant never to sue on them again. Would not likely apply to regulatory amendments. Drilling and fracking under the Council-adopted regulations (the ones the State and industry

23 Negotiations Continue Master Contract once again front and center. TOP and its new partner, Cub Creek Energy, approach the City about mineral development soon after the Supreme Court decision. We ve now been negotiating for almost two years. TOP and Cub Creek started with some demonstrations of good faith

24 RIDER WELL Born: January 1982 Put to Rest: August 2016

25 LONGMONT 8-10K WELL Born: October 1994 Flood Damage: 2013 Put to Rest: April 2017

26 OTHER STEWARDSHIP Air Quality Monitoring Water Quality Monitoring Soil Sampling Plugged and Abandoned Well Assessment Flow & Gathering Line Assessments Seismic Review Monitor the state of the law. See Thornton. And these negotiations themselves.

27 NEW SLIDE! FORCED POOLING When two or more separately owned tracts are embraced within a drilling unit, or when there are separately owned interests in all or a part of the drilling unit, then persons owning such interests may pool their interests for the development and operation of the drilling unit (6), C.R.S.

28 NEW SLIDE! FORCED POOLING In the absence of voluntary pooling, the commission, upon the application of any interested person, may enter an order pooling all interests in the drilling unit for the development and operation thereof (6), C.R.S.

29 NEW SLIDE! FORCED POOLING A nonconsenting owner of a tract in a drilling unit which is not subject to any lease or other contract for the development thereof for oil and gas shall be deemed to have a landowner's proportionate royalty of twelve and one-half percent... and then be liable for further costs as if he had originally agreed to drilling of the well (7)(c).

30 Proposed Cub Creek Energy and Top Operating Site Relinquishment Agreement

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33 CUB CREEK & TOP NO DRILL PROPOSAL Desired Outcome: Protect the Public Health of Our Community Proposed Solution: End oil and gas operations within the Longmont city limits, in return for a cash payment to TOP of $3 million from future mineral royalties, and a lease of City-owned mineral rights to Cub Creek

34 PHASING OUT OF OIL AND GAS FACILITIES Sites Removed: - Sandstone - Evans - Sherwood - Bogott - Dworak - Upper Adrian - Hernor - Pietrzak - Lower Smith Sites Adrian Remain: - Koester - Olander Knight - Smith? Facilities Removed: - Hernor Tank Battery - Lower Adrian Tank Battery Active Wells to be P&A: - Powell #1 (within 120 days) - Stamp 31-2C - John Y. Mayeda #2 - Evans #6 - Sherwood #2 - Serafini #1 - Sherwood #1 - Longmont #1 Olander Knight Smith

35 RELINQUISHMENT OF WELL SITES Phase I: Sandstone, Evans and Sherwood Phase II: Hernor and Lower Adrian Tank Batteries Bogott, Lower and Upper Adrian, Koester, Pietrzak, Hernor and Dworak drill sites Phase III: Effective upon production from a well from the Knight site relinquishment the remaining Smith site

36 KNIGHT SITE ACCESS ROAD Providing an access road and revocable permit to cross the City owned Smith Property to the Cub Creek drill pad located outside of the City

37 Site Access Roadthe Crosses northern portion of the City Owned Smith Property Connects with County Road 3 Provides for safer access than access from State Highway 66

38 PLUG AND ABANDON EXISTING ACTIVE WELLS Phase I: Plug and abandon the Powell well within 120 days of the execution of the agreement Phase II: Plug and abandon the Serafini well within two years of the execution of the agreement Phase IV: P&A Remaining 7 wells Deactivate or remove all flow lines, gathering lines, and other facilities associated with the above wells

39 AGREEMENT WITH CUB CREEK Lease of City Mineral Rights to Cub Creek 516 acres - Hernor; Hartman; and French properties at a Competitive royalty rate at 20% & $1000/acre bonus Non-surface disturbance 20 year term with right of first refusal Amend existing oil and gas leases on city owned properties to non-surface disturbance;

40 AGREEMENT WITH TOP OPERATING Amend the Royalty Account City payment of $3 million from future city royalty proceeds upon Relinquishment Date: Relinquish all 11 consolidated drill sites located on City property;

41 AGREEMENT WITH TOP CONT D Amend the leases to a non-surface disturbance status; Plug and abandon of all 8 active oil and gas wells; deactivate or remove all associated flow and gathering lines and facilities; Elimination of up to 80 new oil and gas wells in the City

42 A METRIC Potential Number of New Oil and Gas Facility Locations in Weld County Portion of Longmont City Property 200 Pre-2012 Master Contract Site Relinquishment Agreement 11 0

43 Council Questions and Discussion

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